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Why Foundation Medicine Stock Is Skyrocketing 28.3% Higher Today

What happened

After announcing that Roche Holdings (NASDAQOTH: RHHBY) will acquire it for $137 per share in cash, shares in Foundation Medicine (NASDAQ: FMI) are soaring 28.3% at 11:30 a.m. EDT today.

So what

Roche Holdings already owned more than 50% of Foundation Medicine and it's already selling Foundation Medicine's genetic profiling test outside the United States.

Two people shaking hands while exchanging a stack of $100 bills.
Two people shaking hands while exchanging a stack of $100 bills.

Image source: Getty Images.

A stand-still provision that's kept Roche Holdings from acquiring or selling its Foundation Medicine shares expired earlier this year, and following that expiration, Roche Holdings has wasted no time in securing Foundation Medicine lock-stock-and-barrel. The all-cash acquisition totals $2.4 billion, and including Roche's prior investment, it values Foundation Medicine at $5.3 billion.

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The acquisition makes Roche Holdings the market share leader in screening advanced cancer patients. Last year, Foundation Medicine screened 67,000 people to collect genetic data that helped inform cancer treatment regimens -- up 54% from 2016. Rising revenue from screening cancer patients and from collaborations with drugmakers on the development of new drugs resulted in full-year sales of $153 million in 2017 -- up 31% from 2016.

Last year's strong performance has carried over into 2018. Clinical test volume accelerated 57% year over year to nearly 22,000 tests in Q1 2018, and as a result, revenue grew 101% to $52.8 million last quarter when compared to Q1 2017.

Now what

The deal is expected to close later this year. Since Foundation Medicine's board has accepted the offer, every board member has agreed to tender their shares in the deal, and Roche currently owns more than half of Foundation Medicine, I don't expect any hitches.

Roche Holdings plans to operate Foundation Medicine as an independent, stand-alone company, but Foundation Medicine will have plenty of support available from its parent company to grow demand for its latest product: FoundationOne CDx.

A comprehensive genomic profiling test for all solid tumors, FoundationOne CDx recently secured Medicare reimbursement at an initial rate of $3,500 per test. Foundation Medicine estimates that only 150,000 of the 1 million Americans with advanced cancer are currently being screened, and if screening becomes the standard for all cancer patients, it could be a $12 billion to $15 billion market opportunity.

There's little reason to hold onto Foundation Medicine shares because this is a cash deal, but investors might want to take a close look at Roche Holdings. Although Roche Holdings is a big company and Foundation Medicine won't move the needle much for it initially, this acquisition could contribute meaningfully to Roche Holdings financials over time.

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Todd Campbell owns shares of Foundation Medicine. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.